Small-Farm Cooperatives

The establishment of small farm cooperatives aims to address the problem of small farm inefficiencies, especially in the developing world. Farm sizes of less than two hectares form 85% of all farms in the world (von Braun, 2008). On the whole, these small farms are not economically efficient because of relatively high input costs compared to profits. Small farmers in developing countries are unable to take advantage of economies of scale and often lack the financial resources such as credits and loans to make their farms profitable. Establishing cooperative farms in areas of developing countries where small farms are prevalent will allow farmers to share capital and reduce input costs thereby increasing production and income.
There are many advantages to establishing small farm cooperatives. According to Motiram and Vakulabharanam, farmers in cooperatives have more bargaining power, lower transaction costs in getting loans, and better access to information about its members and their resources compared to “outsiders” such as moneylenders and contractors, benefits which strengthen the cooperative’s power (Motiram & Vakulabharanam, p. 4). Farmers have more individual power and control over production, including inputs and land use, than they do through contract farming, and thus food security is less vulnerable under a cooperative model (Motiram & Vakulabharanam, 2007).

The Agricultural Cooperatives for Ethiopia (ACE) Program in conjunction with USAID and ACDI/VOCA, has fostered the development of cooperative farms in Ethiopia (Dorsey & Assefa, 2005). The program's aims were to train farmers in operational skills for cooperative farming, support the development of infrastructure, establish and strengthen unions, and improve market linkages (Dorsey & Assefa, 2005). Largely successful in achieving these goals, the scale of their success can be seen in the increase in food production and food security (Table I). The program began in 1999, as an extension to the pilot Cooperative Union Project (CUP) in Oromia, Ethiopia, intended to reach completion by 2004.

Similar efforts to establish cooperatives, or “village clusters,” and to put agricultural extension programs in place, have been made by the Millennium Villages Project in Ruhiira, Uganda. By increasing fertilizer use and planting improved maize seed, the Ruhiira village cluster was able to increase output from 1.8 tons per hectare to 3.5 tons per hectare. The food requirement index, which is defined as total production divided by consumption requirement, went up from 0.5 to 2.8 for maize and 1.8 for beans, indicating a gigantic step forward for food security in the region. Farmers’ incomes also increased; maize was sold at a price 60% higher than local maize prices (Buse, Ludi, & Vigneri, 2008)

Installing New Cooperatives
A “cooperative” refers to the unification of farms belonging to many small holder farmers. The seven international principles of cooperation – voluntary and open membership; member economic participation; autonomy and independence; provision of education, training, and information; cooperation among cooperatives; and concern for community – would apply to these cooperatives (Ortmann & King, 2006). While each farmer will continue to keep his own land and farm it individually, the farmers will collaborate as a cooperative in procuring credit, inputs, and marketing their products. A central storage facility (outlined in more detail by the Food Storage Program) will be available to each cooperative.

In order to form successful cooperatives in developing countries, first the intervening NGO must strengthen itself by training staff and having funds in place. The NGO staff must be well trained so that they can inspire farmers to accept the cooperative solution and to embrace the intervention to their farming practices.

The next step in implementation would be to train governing bodies in the cooperatives to manage the cooperative and unions. ACE trained over 1000 people who formed Government Cooperative Promotion Bureaus (CPBs) for the cooperative programs in Ethiopia (Dorsey & Assefa, 2005). These CPBs essentially became the governing bodies of the cooperatives and unions, from general management to warehouse keeping (Dorsey & Assefa, 2005) Training is a key step to making cooperatives sustainable because it will allow the small farmers to carry on the cooperative once the intervening forces leave. Along with crop-specific training, strategic agricultural marketing training, establishment and maintenance of unions, acquisition of market information, price stabilization, and warehouse management must also be provided (Buse, Ludi, & Vigneri, 2008). The establishment of unions, or enhancement of existing unions, is a vital process for the success of cooperatives. With the assistance and advice of ACDI/VOCA, the Lumme-Adama Farmers’ Cooperative Union in East Shewa was able to initiate bidding to reduce the price of fertilizer, and as a result saved $4,000,000 on fertilizer (Walton, 2005) The Oromia Coffee Farmers’ Cooperative Union was assisted by ACDI/VOCA in establishing market connections abroad and handling exports directly by cutting out the middlemen. The union was able to export 182 tons of coffee to specialty markets in Europe under the registered label of “free trade,” thereby increasing the value of the commodity and increasing profit for the farmers (Walton, 2005). The role of the intervening NGOs is not only to train the cooperative and union members but also to establish key connections in the market and provide financial resources to get the cooperative up and running.

Access to credit and loans is essential for the functioning of cooperatives and is discussed in more detail in the section on the microfinance solution.
Implementation will occur on a case-by-case basis. Small farm cooperatives should not be established in areas where successful agriculture is already occurring and should not replace successful commercial farms or large-scale farms. Cooperatives should be implemented in regions where there is a weak and/or failing market, high input costs, and where input and product marketing services are lacking (Ortmann & King, 2006). The Millenium Villages Project has established many cooperatives in sub-Saharan Africa including Ruhiira, Uganda and Mayange, Rwanda (Buse, Ludi, & Vigneri, 2008).

Funding the Project

The primary motivator for investment such as this is a very low payback time, which was three years in the case of USAID’s project in Ethiopia. There is a strong incentive for governments to fund the creation of cooperatives. However, an external consulting group should still be brought in to implement the project, and the financial transfer should be wholly transparent to prevent corruption.

In cases where the government cannot afford to provide funding order to get cooperatives started, there must be initial investment by outside groups such as USAID or ACDI/VOCA as was done in the ACE program in Ethiopia.

Type of funding:

The funding should be mostly EFT (electronic fund transfer) to increase transparency, when possible. The organization providing the initial funding should use EFT, as well as the coordinating body/consultancy group which should directly transfer funds to the firm providing the capital good, to prevent corruption from occurring (where possible).

Cash money will certainly be required at some level (for training/purchasing capital) and this must be carefully accounted for.

Loans from local banks should definitely be used, with the mortgage/risk being footed by the aid providing entity as a guarantor. Going back to the case study, this worked when the Bank of Abyssinia provided $625,000 of which 50% of the loss was guaranteed by USAID- BoA received a 100% repayment rate on time in the first year.

The actual costs will vary vastly with each case in question. The idea is to input money that will have a repayment time of around 5 years because this is crucial in measuring the success of the plan.

Sources of Support

Non-profit consultancy services such as AIDC, ACDI, Cultivo, etc. should enter into a “public-private partnership” to implement the plan. Groups such as the IFPRI can assist with case analysis and funding allocation. Global organizations such as UNDP and WFP will be limited in their involvement but would be a good source of funds and human capital.

With the adequate support and success, the establishment of cooperatives may have very proximate effects. The Cooperative Union Project in Ethiopia was a pilot program that ran for two years and was then extended by ACE by five more years. The purpose of the ACE program was to initiate and establish the cooperatives on firm ground. Thus the estimated time for cooperatives' success to occur is five to seven years. After that the cooperative will follow its course according to its growth and success.

Possible Errors

According to cooperative theory, there are five inherent problems of traditional cooperatives, namely the “free rider, horizon, portfolio, control, and influence cost problems” (Ortmann & King, 2006). To elaborate on one of these issues, the free rider problem occurs when individual member benefits are disproportionately matched to the amount of work or investment the member has given to the cooperative. Due to these inherent weaknesses, in the future farmer cooperatives may need to exit the market or reorganize. The formation and growth charts of the cooperatives will determine the future of the cooperatives. It is possible for the cooperatives formed as a result of this solution to adopt new business structures (i.e. investor-oriented firms (IOFs)).

Works cited:

Buse, K., Ludi, E., & Vigneri, M. (2008). Sustaining and Scaling the Millennium Villages: Moving from rural investments to national development plans to reach the MDGs.London: Overseas Development Institute.